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Category > Accounting Posted 19 Aug 2017 My Price 14.00

Happy Feet Inc

Variable and absorption costing—three products

Happy Feet Inc. manufactures and sells three types of shoes. The income statements prepared under the absorption costing method for the three shoes are as follows:

 

Happy Feet Inc.

Product Income Statements—Absorption Costing For the year Ended December 31, 2016

Cross Training

Shoes                     Golf Shoes

Running Shoes

 

 

Revenues   ........................................           $800,000                      $690,000                    $625,000

Cost of goods sold................................      416,000                        338,100                       418,750

                                                                 

Gross  profit.......................................                      $384,000                      $351,900                    $206,250

Selling and administrative expenses ..............         336,000                        248,400                     350,000 Income from operations ..........................         $  48,000                  $103,500                   $(143,750)

                                                                                                             

In addition, you have determined the following information with respect to allocated fixed costs:

 

 

Fixed costs:

Cross Training

Shoes                     Golf Shoes

Running Shoes

 

Cost of goods sold .............................       $128,000                         $89,700                    $118,750

Selling and administrative expenses ............            96,000                           82,800                       118,750

 

These fixed costs are used to support all three product lines. In addition, you have determined that the inventory is   negligible.

The management of the company has deemed the profit performance of the running shoe line as unacceptable. As a result, it has decided to eliminate the running shoe line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the running shoe line, management expects the profits of the company to increase by  $143,750.

a.     Do you agree with management’s decision and conclusions?

b.    Prepare a variable costing income statement for the three products.

c.     Use the report in (b) to determine the profit impact of eliminating the run- ning shoe line, assuming no other changes.

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Maurice Tutor
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Status NEW Posted 19 Aug 2017 11:08 PM My Price 14.00

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